COMMISSIONER OF INCOME TAX, LUCKNOW versus U.P. COOPERATIVE FEDERATION LTD.

Citation: [1989] 1 S.C.R. 586 · Decided: 10-02-1989 · Supreme Court of India · Bench: R.S. PATHAK · Disposal: Disposed off

Judgment (excerpt)

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COMMISSIONER OF INCOME TAX, LUCKNOW 
v. 
U.P. COOPERATIVE FEDERATION LTD. 
FEBRUARY 10, 1989 
[R.S. PATHAK, CJ AND RANGANATH MISRA, Jc] 
Income Tax Act, 1922: s. 14(3)(iii)/Income.Tax Act, 1961: S. BOP 
(2)(d) -Assessee-Apex Cooperative Society----Cash security-Furnished to 
manufacturer Cooperative Society under agency agreement-Loans advan-
ced to member cooperative societies for carrying on business-Whether in-
vestments-Interest earned thereon--Whether entitled to exemption from tax. 
Words and Phrases: 'Investment'-Meaning of-s. 14(3)(iii), 
Income Tax Act, 1922. 
Clause (iii) of Section 14(3) of the Income Tax Act, 1922 exempts 
interest and dividends derived by a cooperative society from its invest-
ments with any other cooperative society, from payment of tax. 
The respondent-assessee, an apex body having as its members 
various District Co-operative Societies, District, Co-operative Banks and 
some Government and other co-operative Societies within the State of 
U.P., was appointed as one of the wholesale dealers under clause (1) of 
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the agency agreement entered into with a co-operative sugar factory for 
distribution of' sugar produced by the latter during the crushing seasons 
1958-59 and 1959-60. Simultaneously with the execution of the agree-
ment it furnished a cash security of Rs. Two lakhs to the manufactnrer :. 
under clause (20) of the said agreement for the period of two years,_,,.,-, 
which was to carry interest at the rate of 41/2 per cent per annum. 
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In pursuance of a separate agreement entered into between it and 
the State Government the assessee undertook to arrange for lifting, 
handling, storing and distributing to the retailers the stock of sugar 
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released by the Government of India. In an yet another agreement 
entered into between the assessee and member societies the latter under-
took to work as agents for the wholesale distribution of sugar in their 
districts. Since they were not in a position to arrange the entire finance 
for the business the assessee agreed to arrange for the same. The money 
thus invested in the business was to earn interest at the rate of 6 per cent 
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perannum. 
586 
COMMR. OF INCOME TAX v. U.P. CO-OPT, FEDERATION 
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In the accounting year in question the Income Tax. Ollicer re-
jected the claim of the assessee for deduction, on ground of statutory 
exemption under s. 14(3) of the Act, of the amounts of interest received 
respectively from the cooperative Sugar factory on the cash security 
deposit and from member societies on temporary loans advanced for 
financing business. The Assistant Appellate Commissioner rejected. 
assessee's contention. The Appellate Tribunal rejecting the former 
claim took the view that the amount of interest received on cash security 
furnished by the assessee for carrying on the sugar agency business 
could not be said to be interest from securities or investments as under-
stood under s. 14(3)(iii) of the Act. Rejecting the latter claim it held that 
the amount on which interest had been earned did not constitute invest-
ment and, therefore, was not covered bys. l4(3)(iii) of the Act. But the 
High Court accepted the claim in regard to both the amounts. 
Disposing of the appeal by the Revenue, the Court, 
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HELD: I. I The Tribunal did not err in holding that the amount 
received as interest on the cash security from the cooperative 
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sugar factory was not covered under s. 14(3)(iii) of the Income Tax 
Act, 1922. [591BI 
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1.2 The High Court failed to take note of the fact that the sum of 
Rs. Two lakhs had been given a security and the arrangement entered 
into between the assessee and the cooperative sugar factory stipulated 
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payment of interest of 41/z per cent per annum. This sum was repayable 
to him on the expiry of the period fixed in the agreement after adjust-
ment of accounts. It could not, therefore, be said to be an investment. 
, The amount of interest earned thereon thus represented only interest on 
_;,.._ the security deposit and could not be mixed up with the other sums 
-. ! -received by the assessee in course of carryin2 on its business. It was not 
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available to be exempted. l589G; 590FI 
2.1 The a~ount of interest received by the aSsessee on advances 
to its members was income from sugar business and was, therefore, 
exempt under s. 14(3)(iii) of the Act. [5958] 
2.2 The money provided by the assessee was by way of investment 
with other cooperative societies. If 

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